CFA Level I · CFA Level I Exam · Monetary Policy
The neutral interest rate in an economy is most likely equal to the sum of the:
The neutral rate equals the trend real growth rate plus the target inflation rate. At this level the policy rate neither stimulates nor restrains the economy, so it provides a benchmark for judging whether policy is expansionary or contractionary.
- Atrend real growth rate of the economy and the target inflation rateCorrect
- Breal risk-free rate and the expected default premium on government debt
- Cexpected inflation rate and the output gap measured as a percentage of potential GDP
Explanation
The neutral rate is the rate that neither stimulates nor restrains economic growth. It equals the trend rate of real economic growth plus the target inflation rate. The other options mix in components that are not part of this definition.
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